by Archie M. Richards, Jr.
May 28, 2007

During a recent speech, a woman asked me about the price histories of the 9 exchange-traded funds I recommend. (See archierichards.com.) I answered that price histories are irrelevant. She expressed surprise.

Generally, stock price histories are indeed irrelevant. The market focuses on the future. Historic price trends seldom have predictive value.

Nevertheless, I have used price histories a little. Here's how I've gone about selecting my recommendations:

By far the most important price history is this: During the last 81 years (since 1926) the U.S. stock market, represented by the S&P 500 Index, has compounded at about 10.6 percent a year - a marvelously favorable record!

This occurred despite the Great Depression of the 1930s and the high inflation of the 1970s knocking the stuffing out of stock prices. But both of those misfortunes were caused by the federal government's wretched economic policies. Today's policies are considerably better. For the foreseeable future, severe economic travail is highly unlikely.

The last 81 years also contained the horrific World War II. The wars of today, more like international police work, are far less damaging and costly - another big improvement.

All over the world, government policies are more favorable than they've ever been. I therefore expect the stock market to perform at least as well in the foreseeable future as they have in the last 81 years. To be conservative, I estimate stock returns of at least 10 percent a year over the next decade or two.

As a result, I suggest that you simply buy the market. Individual stocks are too risky. Acquire broad aggregations of stocks using index funds or exchange-traded funds. Don't try to beat the market. Just let the market do the work.

For double diversity, acquire different classes of investments. When some of the groups fall in value, others may be rising. This reduces the volatility of the whole, so that when stock prices fall sharply, you'll be less inclined to sell.

Now for the specifics. Many advisors base their allocations on the relative market values of various sectors. But I adjust the percentages as follows:

• The market value of bonds is greater than that of stocks. But bonds are inferior to stocks as investments. 20 percent for long-term bonds seems sufficient, as an offset to stocks.

• The market value of real estate investment trusts (REITs) is only a fraction of the market value of all U.S. stocks. But real estate is a key ingredient of the economy, and it's an inflation hedge. I beef up the REIT component to 20 percent, leaving 60 percent for stocks.

• Foreign stocks constitute 56 percent of the market value of the world's stocks. But I split the two groups down the middle: 30 percent for foreign and 30 percent for U.S. stocks.

• European stocks compose 59 percent of the market values of all foreign stocks, with Far Eastern stocks at 27 percent and emerging market stocks at 14 percent. But I don't care for European economic politics, while the prospects for emerging nations are very promising. I therefore set the three groups at 10 percent each.

• Small stocks compose only 8 percent of the market values of all U.S. stocks. But price histories reveal that small stocks perform better than the biggies. I therefore adjust the percentages to two-thirds for big stocks (20 percent of the whole portfolio) and one-third for the little guys (10 percent of the whole).

• Originally, I divided the U.S. stocks equally between growth and value. But during the last 6 years, value stocks have performed especially well. Because of this, and for other reasons described in my book, "Understanding Exchange-Traded Funds," I've switched more to the growth side. For big stocks, I recommend 15 percent growth and 5 percent value. For small stocks: 7 percent growth and 3 percent value.

Price histories did help to make these choices. But only to a modest extent.